22 June 2005 External T.I. 2005-0136421E5 - single-purpose corporation

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: whether transitional relief to the termination of the administrative practice referred to in Income Tax Technical News No. 31R would also apply where, upon the shareholder's death, the shares of the single-purpose corporation are transferred to a trust of which the shareholder's spouse or common-law partner is a beneficiary

Position: Yes, provided that the trust is one described in paragraph 70(6)(b) of the Act

Reasons: consistent with the rationale to permit a transfer on death to a spouse or common-law partner

2005-013642
XXXXXXXXXX T. Harris
(613) 957-2114
June 22, 2005

Dear XXXXXXXXXX:

We are writing in response to your email correspondence of June 14, 2005 wherein you requested clarification regarding the tax implications of a transfer of shares of a single-purpose corporation holding U.S. - based real estate upon the death of the current shareholder.

In the situation you describe, an individual resident in Canada is the owner of the shares of a single-purpose corporation that owns real property situated in the U.S. The shares of the single-purpose corporation were acquired before January 1, 2005. In preparing his estate plan, the individual proposes that upon his death the shares of the single-purpose corporation be transferred to a trust of which his current spouse will be a beneficiary. You have requested our opinion as to whether such arrangement will be considered to be a transfer of the shares "to the shareholder's spouse" for the purposes of Income Tax Technical News No. 31R (the "ITTN"), which was published on November 24, 2004.

Our Comments

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 ("IC-70-6R5") dated May 17, 2002 issued by the Canada Revenue Agency ("CRA"). Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide the following general comments that may be of assistance.

As noted in your correspondence, the ITTN indicates that, effective after December 31, 2004, the CRA's administrative practice not to assess a taxable benefit under subsection 15(1) of the Income Tax Act (the "Act") where the taxpayer is the shareholder of a single-purpose corporation that has been established to hold U.S. - based real property will no longer apply where, inter alia, a person acquires shares of a single-purpose corporation unless such share acquisition is the result of the death of the individual's spouse or common-law partner. The ITTN also states that the administrative practice will continue to apply to those arrangements that were in place on or before December 31, 2004, until the earlier of two dates; the relevant date for purposes of your enquiry being the disposition of the shares of the single-purpose corporation, other than a transfer of the shares to the shareholder's spouse or common-law partner as a result of the death of the shareholder.

The rationale for allowing the administrative practice to continue where the single-purpose corporation's shares are transferred to a spouse or common law partner on the death of the shareholder is that such transfers generally occur on a tax-deferred basis pursuant to paragraph 70(6)(a) of the Act. The CRA did not want to require the spouse or common-law partner to have to cause a taxable disposition in such instances should the taxpayer desire to unwind the arrangement in order to avoid the possible application of subsection 15(1) of the Act. To be consistent with this rationale, we believe that it would also be appropriate to extend this exception to a situation where, on the death of the shareholder, the shares of the single-purpose corporation are transferred to a trust described in paragraph 70(6)(b) of the Act. Consequently, the administrative practice referred to in the ITTN will continue to apply to those arrangements that were in place on or before December 31, 2004, (including any renovation or addition to a dwelling which was acquired before January 1st, 2005, and to a dwelling which was under construction on December 31, 2004) until the earlier of:

? the disposition of the particular U.S. - based real estate by the single-purpose corporation; or

? a disposition of the shares of the single-purpose corporation, other than a transfer of such shares as a result of the death of the shareholder to either

a) the shareholder's spouse or common-law partner, or

b) a trust described in paragraph 70(6)(b) of the Act.

Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5 and should not be construed as confirmation that the trust described in your correspondence will be a trust described in paragraph 70(6)(b) of the Act.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

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